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Yield Curve Steepens Dramatically: What's Going On?

US treasuries are seeing action we have not seen for a while: Strong sharp steepening of the yield curve.

The yield curve is said to steepen when the spreads between short-term and long-term rates increases. The yield curve flattens when spreads shrink.

  • A bearish steepener occurs when rates are rising and long-term yields are rising more than short-term rates. Spreads widen.
  • A bullish steepener occurs when rates are falling and short-term rates are falling faster than long-term rates. Spreads widen.
  • A bullish flattener occurs when rates are falling and long-term rates are falling faster than short-term rates. Spreads narrow.
  • A bearish flattener occurs when rates are rising and short-term rates are rising faster than long-term rates. Spreads narrow.

The terms bearish and bullish refer to capital gains (bullish) or losses (bearish) if one is invested in government bonds.

Bearish Steepener Meaning

A bearish steepener is generally a sign that market participants believe the economy is getting stronger and the Fed (Central Bank), will be hiking rates faster than previously anticipated or more than anticipated.

What Happened Today?

  1. The housing market was stronger than expected: Housing Starts Jump More Than Expected: Economy Overheating?
  2. The current account deficit shrank more than expected: Current Account Deficit Shrinks Due to Hurricanes

June Rate Hike Odds

 https://s3-us-west-2.amazonaws.com/maven-user-photos/mishtalk/economics/zmfATcSa4EegwR7v_znq6Q/VCILyFJSl0m3O0CTYqo7GQ

Synopsis

  • The Fed Funds rate is currently 1.25% to 1.50%
  • The odds of two quarter point hikes through the June meeting increased from 32.5% yesterday to 38.1% today. This is consistent with the bearish steepening of the yield curve.

I did not believe the Fed would hike as much as expected in 2018, and today does not change my mind.

By Mike "Mish" Shedlock

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